These three Canadian marijuana stocks are buys, analysts say

It may seem that the capital markets these days are 24/7 blockchain, but the crypto craze has overshadowed a sizable rally in cannabis stocks.

Led by Canopy Growth Corp. (TSX:WEED), which in October struck up a deal with liquor giant Constellation Brands, many LPs hit all-time highs in the fourth quarter of 2017.

So is the sector overvalued? Opinions will vary, but we found three Canadian marijuana stocks analysts think are currently undervalued.

Beacon Securities analyst Vahan Ajamian thinks The Hydropothecary Corp. (TSXV:THCX) is an example of a cannabis stock with big upside. In a note to clients on December 27, Ajamian maintained his “Buy” rating and one-year price target of $8.50 on Hydropothecary, implying a return of 126 per cent at the time of publication. The analyst says he was surprised when shares of the company fell following its Q1, 2018 results, a quarter that revealed Hydropothecary was producing cannabis at an industry low cost of just $0.89 per gram.

“We were surprised to see the company’s shares trade down following the release of these industry leading metrics,” Ajamian said. “We believe this is likely due to the conversion of debentures at significantly lower levels than the current share price – which may take a few more sessions to churn through. However, with industry leading revenue and costs per gram, plans underway to build 1.3MM sq. ft., a likely near-term catalyst with the SAQ and a valuation well below the company’s peers we see compelling value in Hydropothecary’s shares at current levels.”

At Clarus Securities, analyst Noel Atkinson recently reiterated his “Buy” rating on MedReleaf (TSX:LEAF), which made headlines after announcing a multi-year contract with Shoppers Drug Mart. The analyst says the deal proves there is a market for the kind of “premium” product that MedReleaf specializes in.

““The supply agreement should support our revenue estimates – which already incorporate a sizable amount of wholesale shipments for medical and rec cannabis starting in mid-2018 – and boost MedReleaf’s efforts in both the rec and medical cannabis segments,” Atkinson says. “Shoppers is possibly the best known pharmacy chain in Canada with substantial market share (particularly in Ontario and in major urban areas). It should support MedReleaf’s medical cannabis export initiatives and give it major credibility with other Canadian pharmacies. We think the MedReleaf/Shoppers agreement also makes a strong case that there will be a sizable place in the medical and rec markets in Canada for premium-priced cannabis. MedReleaf should also get a credibility boost for its rec cannabis wholesale efforts with provincial government purchasing agencies.”

Landry say that with $103-million in the bank, Organigram has the cash to fund its Phase 3 expansion and other international or domestic grwoth initiatives. The analyst says the stock looks cheap compared to its peers.

“Since OGI’s large expansion announcement, shares are up only ~3%, underperforming the broader industry, and suggesting the upside potential from Phase 4 has yet to be priced in,” Landry said. “This makes OGI’s current valuation quite attractive in our view which at 8x CY19 EV/EBITDA represents a ~50% discount to Senior LP peers. Given the above we maintain our BUY rating. Our target is derived from a DCF using: (1) a discount rate of 11% (11.5% previously), (2) avg. market share of 6%, and avg. EBITDA margin of 31% (29% prior), and (3) terminal growth of 3%.”

About Nick Waddell

Cantech Letter founder and editor Nick Waddell has lived in five Canadian provinces and is proud of his country's often overlooked contributions to the world of science and technology. Waddell takes a regular shift on the Canadian media circuit, making appearances on CTV, CBC and BNN, and contributing to publications such as Canadian Business and Business Insider.